Deal focus: EMR unearths coal value with Adaro

Global mining operator Rio Tinto's decision to exit the coal business came at the perfect moment for EMR Capital. The resource-focused GP had closed its second fund in 2016 and was looking for investment opportunities in coking coal. When Rio Tinto's last coal asset, the Kestrel facility in Queensland, came up for sale, the firm jumped at the chance.

"The future of hard coking coal is very positive from an investment perspective, because it is highly correlated to global growth, particularly in Asia and in similar economies around the world," says Jason Chang, CEO and managing director of EMR. "In addition, supply is becoming more and more constrained and prices can increase even as a result of short-term disruptions in supply."

EMR partnered with Indonesian coal producer Adaro Energy to pay $2.25 billion for Rio Tinto's 80% stake in Kestrel, marking the GP's biggest mining commitment and Adaro's largest investment outside Indonesia. Now the two are set to operate the mine jointly as global demand for coking and thermal coal products continues to grow.

Coking coal, which is essential in steelmaking, has long been a focus of EMR's mining investments, along with other minerals that fuel industrial development in countries such as China, India and Brazil. But the same factors that appealed to the GP were also obvious to other mine operators, and high-quality assets have been difficult to come by.

"The opportunity to acquire an asset like Kestrel in the Bourne Basin, the premium coking coal basin in the world, is very much once in a generation, or even once in a lifetime," says Chang. "We see this as both a really outstanding asset on a standalone basis, and also a very rare and unique opportunity."

The Kestrel facility stood out for several reasons. It was a de-risked asset developed by a well-respected global operator with over 25 years of operational history and then Rio Tinto's decision to sell the mine was based on its broader strategic plan, not due to problems with the facility itself. The investors could be sure their new purchase had a stable base from which to grow.

While EMR sees opportunities in the developing markets' steel mills, Adaro is also focused on power plants – the company expects demand for coal power to continue to rise in these countries along with electricity use by their middle classes. But its involvement in Kestrel is not limited to the mine's thermal coal deposits: the company plans to work with EMR as a full partner in the development of the facility.

"The combination of Adaro's industry position, intellectual property, expertise, and experience, combined with EMR's overall experience with coal, mine operating and investment management, make this consortium appropriate to manage a large coking coal mine such as Kestrel," Chang says. "Adaro is very well-known, not just in Asia but globally, and we're very aligned in optimizing the asset."   

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• EMR Capital